Understanding Revenue & It's Impact on Business Acumen
Revenue is the lifeblood of an organization, and understanding how this measure is defined, calculated, and controlled is essential in having true business acumen.
Simply, revenue is the money a company generates from its business activities during a particular period of time. Although that may sound simple, there are some complexities when it comes to understanding revenue…and the first begins with what we call it. There are many words we use for this word including revenue, sales, or in Europe it’s often referred to as turnover. On a financial statement, you may see it listed any number of ways, including:
- Total revenue
- Net revenue
- Total sales
- Net sales
- Top line
Top line? I know that one is confusing. Revenue is sometimes referred to as the top line because that normally where it’s found on an income statement, the top line. Fundamentally, revenue is reflective of the transactions that have occurred during a particular period, between the company and its customers. It’s typically reported in months, quarters, or years, but companies may measure it in days, or even hours in some cases.
Now, notice I said transactions, and not actual cash received. This is an important point to distinguish - revenue is reflective of when a company recognizes a transaction that has occurred between the company and the customer. In the case of a retailer, it’s a simple concept. When you buy a product, the company recognizes that transaction as revenue or a sale, and if you paid in cash, they receive the money immediately. But in the case of a business-to-business transaction it may be more complicated.
Imagine you’re Campbell’s Soup, they sell a semi-truck full of soup to a grocery store. When they deliver that truckload of soup, Campbell recognizes the revenue because the transaction is completed when the grocery store received the truck. However, the grocery store may not actually pay Campbell’s Soup until they receive an invoice, and then they might take 60 or even 90 days to pay. So, it may be easy to get confused. Revenue is recognized when a transaction occurs, not when they receive the cash. As a general principal revenue is recognized when a product or service is delivered, it is an economic measure that is reflective of transactions.
Revenue also sits at the very top of the profit equation, profit = revenue – expenses. To fully understand this concept, it’s also essential to see revenue as a lever, and we need to understand how to impact that lever. So, what are ways you can increase revenue? Think about how you can sell more, whether it be the selling of additional products or adding services or finding new customers who will in turn buy more of your product. Another way to increase revenue is to sell the same number of products or services for a higher price. Remember, not all ways to increase revenue are created equal…look at the long-term effects. For example, if you raise the price of the product, will you sell the same amount? Or are there barriers that will send people either to other products or just turn people off from buying all together.
Like I said, revenue isn’t as simple as it seems, and it plays a BIG role in your organization’s success. So, make sure you have the business acumen to understand it in depth. We're here to help if you need it, just contact our team members now.